“While many in the industry still expect demand, driven by Asia, to pick up again strongly sometime in 2013 Solid Energy needs to plan to withstand these market conditions for at least the next 12 months and possibly for 24 months or longer.” he says. “As a consequence, we are reviewing all areas of our business, including current and future operations, all fixed and variable costs, and the values of some of our assets, which will result in us taking significant impairments. Our aim is to preserve cash through reduced spending while, as far as possible, maintaining our longer-term value opportunities.”

No one can rationally argue that job losses on this scale, with ensuing loss of wages and company spending, will have a devastating impact of the West Coast economy. The losses will cause incalculable harm.

Solid Energy has attempted to justify redundancies by pointing to a drop in international coal prices; a fall in demand from China; and a $40.2 million “loss” in profits.

Two of the above reasons have a degree of merit – the third reason has been mis-represented to the public.

International Coal Prices

Coal prices have indeed dropped.

From a recent high of NZ$185.47 per metric tonne in January 2011 – to NZ$113.33 at the end of July, this year. This is a drop of NZ$72.14 per metric tonne.

However the July 2012 price (NZ$113.33 per metric tonne) is not much different to the November 2009 price of NZ$115.52 per metric tonne. As a result of the November 2009 low price, Solid Energy had minimal redundancies,

” Globally diversified miner Anglo American PLC said the global thermal coal market looks bearish in the short term, partly due to displacement of U.S. coal demand by shale gas and an economic slowdown in China, but it is still an attractive market over the medium to long term.

“In the short term, we will have a bearish market,” Norman Mbazima, chief executive of Anglo American’s Thermal Coal division, told analysts at a seminar. But “there is very good demand outlook for coal. Coal will continue to be the mainstay of electricity production in the world and this will underpin good prices into the future,” he said.

Gareth Griffiths, head of Anglo American’s Thermal Coal Marketing department, said that the main reason behind the recent collapse in thermal coal prices has been a slowdown in Chinese coal consumption growth.”

” Coal demand is also expected to be fragile amid a weak economic outlook for the rest of the year.

A Reuters poll forecasts this year to see the slowest full-year of economic growth since 1999 as demand for China’s factory goods falls due to the debt crisis in its biggest customer the European Union.

Whilst this may impact on Solid Energy’s profits (as compared to this year and 2011), Solid Energy’s viability does not seem threatened.

The only threat to Solid Energy is it’s saleability. The more profit Solid Energy makes – the higher the share price when it is floated on the Stock Exchange. By contrast, the lower the the profit, the lower the share price.

Which may explain Bill English’s comment in the media item below, “English – Solid Energy not ready for sale”.

Solid Energy Profits

According to Solid Energy’s own Results Announcements 2012 report, the company’s income was actually better than the preceding year,

Good operating performance overtaken by asset write downs

• Trading performance was good in a deteriorating market with strong NZD. Underlying earnings were $99.7 million (2011: $86.2 million). • Asset write downs of $110.6 million net of tax and other adjustments have resulted in a $40.2 million loss after tax (2011: $87.2 million).

In plain english (not the mumbled Prime Ministerial version), Solid Energy made an after-tax profit of $99.7 million – an increase from $86.2 million in 2011.

Employing a book-keeping, accountancy “trick”, Solid Energy reduced their own asset values by $110.6 million. (That’s like saying your house was worth $300,000 in 2011, but only $250,000 this year. You still have your house and you’re living in it – nothing else has changed. Only the theoretical valuation has ‘reduced’. Next year that valuation could rise back to $300,000 or even more or maybe less. That’s creative accountancy for you.)

The point is that Solid Energy’s profit rose from $86.2 million to $99.7 million.

In fact, Solid Energy’s revenue in 2012 was $978.4 million – almost a billion dollars – an 18% increase from the previous year.

Makes sense to me. Im conflicted on this issue. Its tragic on many levels, lost jobs, costs to families, loss of community….however, the Chinese for example have bunkered billions of tonnes of bright coal against future demands and pricing and coal really is primitive technology in this century. It is almost redundant or should be as one of the dirtiest, most dangerous ways of generating power. Take a look at whats left of the Arctic Circle and tell me we need to dig more coal?

Ralph – That thought ran through my mind as well, as I wrote that piece.

I guess we can say it’s a separate (but ultimately related) issue, and what we’re seeing is National doing back-room deals to make Solid Energy saleable. In which case we can expect coal mining become a 100% commercial activity without regard to CO2 emissions.